I’ll get some more color up on this later, but before I head out, I wanted to get this posted:
My Top 10 Myths of the Correction of 2007
1. Chinese regulators caused the meltdown
2. It was Greenspan’s fault.
3. Blame China’s market crash.
4. A Dow Jones Glitch caused the plunge
5. Prices Fluctuate
(And we got fluctuated pretty good)!6. Stock prices will be higher six months from now.
7. Selloffs such as this are healthy.
8. The Fed stands by ready to cut if this gets much worse.
9. The market is not forecasting a weakening economy.
10. This had nothing to do with anything fundamental!
There are specific details under each of the 10 points posted with the full column.
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Source:
Top 10 Myths of Tuesday’s Correction
TheStreet.com, 3/2/2007 3:38 PM EST
http://www.thestreet.com/newsanalysis/investing/10342162.html
The quick pull back => buy-the-dip and drive it back up…. flow of this week’s action is testing the buy-the-dips crowd.
The smaller and smaller dip was encouraging (for Bulls) until Friday late in the session.
I can understand traders wanting to go home neutral, but the main thing we’ve learned this week is there’s a vicious debate going on: Bull vs. Bear.
I believe #10 with regard to the direction and size of the move, but I do think we have to look at other factors to explain the timing. It’s easy to see why stocks were and are overvalued. It was just as easy to see this last week. Hussman’s been calling this move for over a year. So as much as it’s a myth to say it’s not about fundamentals, those same fundamentals have been easy for the momentum traders to ignore for a long time.
If #6 is a myth, does that make the converse (stock prices will be lower six months from now) a legend or a fable?
~~~
BR: In the full article, I call it a “half truth,” noting the odds favor that prices will be both Higher AND Lower over the next 6 months.
Barry,
Do you think that China could be referred to as a spark that lit the timber that was already there in our marketing waiting to be ignited? Or do you think what happened in China had no catalyst affect at all?
The economy is slowing down. Housing is a drag. Lenders will be under pressure. If the fed has been trying to clear the imbalances by raising short term rates, why is any of this a surprise? Earnings should come down. Why trailing earnings make stocks such a value as earnings slow is a mystery to me. Buying stocks for what they earned in the past rather than their future propects is a great way to lose money. The talking heads are getting ridiculous with their ‘reasons for the sell-off’ nonsense. As prices come down, stocks will be buyable again. Gotta clear out the overpriced crap.
Tom C., outside of Google, what would you consider “overpriced crap”? Several names will do.
TIA
Make sure to click through to the full article. Great stuff.
I’d then suggest checking out this
http://www.thekirkreport.com/2007/03/flip_the_chart.html
“Whenever I think I’m being too biased about something, especially in my own technical analysis, I perform a simple, but effective trick. I just filp the chart and see if my analysis would be the exact opposite. In other words, if I’m bullish on a chart and I flip it, frankly I should be bearish about it and vice versa.”
You can probably figure out what the chart is, but worth a peek.
There is a Chinese proverb that goes: “Tall flowers are cut down.” We were well overdue for this, so no one should even ask why we dropped this week. Markets go up from excess liquidity looking for returns, and they go down from liquidity contraction when profits and capital are pulled in. Narrow exit door, last one out is bagholder. Also Chinese saying “May you live in interesting times.” Volatility is here, traders welcome volatility with open arms. These are going to be interesting times going forward, our blogs will get busy this March!
The entire market is overpriced. Some companies more than others. Is the market priced for a slowing economy? My best guess is not yet. Some stocks look like good values here but the good go down with the bad in a correction. I’m looking at things like HNZ, CAT, GD,UTX JNJ, MRK, GE, ITW, ETN, GRMN, AMGN, et., etc., but I think I can get them cheaper as the market finds it’s level. Some (non mortgage related) specialty financials are getting cheap. The variables hanging out there are the damage that could be done to good, steady, although slower, global growth from a slowing US economy, our housing recession and it’s effect on liquidity as well as the imbalances within Asia.
Cramer on t.v. today saying this is ‘an amateur bear-raid.’ WTF? Someone tell him it’s 2007, not 1927.
Seems like the mortgage market VIRUS is moving upstream quickly. 20% delinquencies for CFC’s sub-prime paper? Dude, that BLOWS. And UBS or whoever can make all the sophisticated MBS studies they want to determine if today’s Alt-A paper is gonna stink up the joint pretty soon or not. But man, it’s pretty obvious that Alt-A paper written over the last 24 months is analagous to sub-prime paper written at any point prior to that start point. Dude, it’s a total mess and it’s just started. But hey, that flatscreen looks great.
And can I say that some dude just paid $650,000 for a 475 square foot studio in ALPHABET CITY. That’s insane. The kid makes maybe $150,000 in a good year.
Folks, just wait till Daddy Wall Street starts cutting his kids loose. Wait until he lays off 100,000 people in the tri-state area. See how that overpriced studio m-t-m’s then.
P.S. There is stil ZERO institutional fear out there from my seat. So this biatch might grind down, that would be a killer. And let’s be honest: nobody KNOWS where it’s gonna go. I certainly don’t. So trade the charts and don’t get effed up with the bull$hit funnymentals too much. Chester’s charts might start to sing.
outside of Google, what would you consider “overpriced crap”?
The entire ^HGX comes to mind for a few. Even WY.
All I know is there seems to be an inverse short-term relationship between gas prices and the DJIA. Just as the market was tanking, gas went up $0.30 a gallon here in St. Louis.
Ok, seriously … it was only 5 months ago that the DJIA first went above 12,000. Sometimes it goes up, sometimes it goes down. Sometimes it goes down a lot. If we have half a dozen more 500 point drops in the next couple of weeks, then it’s time to get worries.
Nick Kasoff
The Thug Report
that loon Kudlow had a couple X-Fedheads on CNBC just now, w banner under them reading “Fed expects housing and manufacturing inventories to clear”. i wanted to say, how about that excess stock market inventory. expect that to clear? sure, but at what price
LOL–it couldn’t the 25 trillion of worth of leveraged mystery derrivitives and secuitys that has created a massive credit bubble that is starting to unwind. No it couldn’t be that,so it must be as Kudlow believes:
1. Hillary
2. The liberal news media
3. People just are not thinking happy thoughts!
Check out the latest sub-prime news:
http://online.wsj.com/article/SB117286729439625151.html
“New Century Financial New Century Financial Corp., one of the nation’s largest subprime lenders, announced that it has been informed of a federal criminal inquiry into its accounting and trading in its securities. New Century also said that a failure to obtain waivers from lenders could prompt its auditors to warn of “substantial doubt” over its ability to remain in business.
Another big lender, Fremont General Corp., said it plans to stop making subprime residential loans and is in talks with various parties aimed at selling that business.”
Hillary speaking about capital controls on our debt is less than helpful (this ain’t Malaysia, sweetie). Sen Dorgan’s attraction to trade restrictions as policy, however, is really, really, really brilliant.
Fremont is going down, the first news of the delay came late tuesday, the selloff started the night to wednesday with futures down big, there’s the trigger
I live in Hong Kong and I was talking with a colleague about the markets this week. He was upset that there is lots of talk about how the Chinese market events this week were the cause of issues in the US. He asked me if I felt that Asia caused the US issues, or if I had another theory. I responded: “Fluctuation”. He blistered back at me: “F%#k you too American.”
The tale of the tape for NEW:
1/3/07 3/2/07
31.30 10.92
The tale of the tape for FMT:
1/3/07 3/2/07
15.75 7.13
Current prices include after hours fun.
Just keep repeating “Free Market Capitalism is blah blah blah blah blah” over and over again… and everything will be alright.
Good one, Joe :)
(p.s. it’s a joke, right?)
Kudlow summary:
BEAR:Subprime!
BULL:Liquidity!
BEAR:Subprime!
BULL:Liquidity!
BEAR:Subprime!
BULL:Liquidity!
(repeat for 60 minutes)
Did anyone catch the Richard Suttmeier interview? It was on in the background but I was distracted. Can anyone confirm that he said this is the start of a new bear market?
If so, he’s the first quasi mainstream commentator I’ve heard willing to say it’s more than just a correction.
Glitches? We aint seen nothing yet. Wait until the selling really begins. Systemic risk at an all time high, and it potentially could get very ugly. I heard Laslo warn of the risks last night on Bloomberg, but so far that’s the only pundit who has warned about how serious this could be. Cash is king. “price discovery” takes on an all new meaning in the weeks to follow.
i would like to add one more item. #11 the un-winding of the yen carry trade is causing the sell -off.
gunthestops wrote:
First, advocates for subprime borrowers complain that they don’t have access to credit. Then, lenders develop programs for subprime borrowers which, of course, are more costly. A great many subprime borrowers default. Then, advocates complain that the default rate is evidence of discrimination against subprime borrowers. Lenders start to pull out of that market. Round and round we go.
Seems like the only thing that would satisfy subprime borrowers and their advocates would be a “pay what you want, if you want, when you want” mortgage. Anyone know of a lender planning to offer such an instrument?
Nick Kasoff
The Thug Report
My comment fits in this topic as well, but also continues in the thrust of a prior topic about the ‘Ten reasons for Tuesday.’
—
The “Ten” and each followed by **Eclectic’s comments.
—
1. Chinese regulators caused the meltdown
3. Blame China’s market crash.
** It is true that China’s total economy is small relative to the U.S., but it translates into magnified GDP in the U.S. as the containerized shipping units are unloaded and trans-shipped across the U.S. That is to say, Chinese economic disruptions would be magnified in the U.S. as the opposite effect of “value additions.” In a sense then, this would cause “value subtractions.” It is not hard to understand this; it was the driving principle of the efforts of the West over several centuries to colonize Indo-China and extract raw materials for value-added manufacturing in the West. Strangely, a weakening Chinese economy would cost the U.S. both the export markets for raw materials, the trainloads of raw materials and empty containerized freight units going ‘outbound’ to the coasts, and also the value additions to GDP resulting from importing those containerized freight unit trainloads back ‘inbound.’ The sense of all of this is that ‘retail’ in the U.S. is where the value additions to GDP occur because of the, to now, boundless consumerism in the U.S.
2. It was Greenspan’s fault.
**Greenspan, like all Monetarists, have fooled themselves over time into believing that monetary expansion can alone drive economic output without causing imbalances. I have written extensively on this blog the theoretical reasoning that explains why this is incorrect. Until I did, it had never been explained by any individual or subset among economic theoreticians.
4. A Dow Jones Glitch caused the plunge
**Nobody can ever know why a peacefully grazing herd will suddenly stampede, but, during the stampede each individual head has no capacity to conceptualize the unintentional or accidental actions that stampeded them in the first place.
5. Prices Fluctuate
**Widely stated publicity regarding market volatility can itself be the trigger to a stampede. In that sense getting ‘glitched’ and later knowing it may still not result in an ‘unglitching.’
6. Stock prices will be higher six months from now.
**Maybe yes, maybe no. However, if there has been something mysteriously and psychologically unknown and yet undiscovered in this past week’s market actions, something that has tripped to reversal that enigmatic and aggregate thing, that Freudian ‘id’ that represents the average market participant, then prices may not be higher, and could be quite lower.
7. Selloffs such as this are healthy.
**It’s not that the level adjustment is what is healthy, but it is because at some lower point the economic benefit to the exchange prices is seen by both the sell-side and the buy-side as providing value. At some resulting point, sellers bend their knees and surrender the notion that obtaining the sale price they want is a birthright, and buyers surrender the notion that getting the sale price they want is a birthright. I will say that it seems to me still that, as it relates to housing, sellers haven’t yet pulled out their birth certificates for a review.
8. The Fed stands by ready to cut if this gets much worse.
**Everything about Bernanke’s history and the history of a Monetarist Fed says this is true. Everything I ‘Eclectic’ have written here on this blog, on the topic of monetarism, says it won’t work, without creating additional imbalances. I think Paul Volcker intuitively understood this because of the imbalances monetarism had caused prior to his tenure. It’s hard to know about Bernanke. He’s wrapped himself in a gigantic blanket of monetarist theory over an entire lifetime of teaching and writing, so it’s hard to say how he’d react.
9. The market is not forecasting a weakening economy.
**I don’t think markets can forecast either for the better or the worse. All that I have ever been able to discover philosophically and conceptually is that markets do clearly at times serve as almost perfect inverse indicators of future economic output. This is not so simply explained by defaulting to the notion of ‘market cycles,’ but rather an observation that it is inherent in human nature to ignore any negative attribute that interferes with a current state of assumed and continued benefit.
10. This had nothing to do with anything fundamental!
**For some it was fundamental; for some it was because of momentum; for some it was because of inattention; for some it was because of ignorance; for some it was only because of purely random reasons. If a rational person assumes that P/E multiples are only rational if not higher than some level lower than at the beginning of the week, then that person will assume the market action last week was the result of the expected and overdue fundamental rationalization of formerly incorrect market participants. However, another rational person may assume that market actions that pushed P/E multiples lower during the week resulted from just the opposite.
For the person who asked about Richard Suttmeier, I have a little information. He said he was looking ahead to the Beige Book and expecting signs of weakness. Said next week could be a breather before the next leg down. Sees new bear market. Mentioned financial stress in banking system like residential construction loans.
Whats a Bear and a Bull market?
Is?
A Bear is a carnivore taking his property lines back?
A Bull is a charge attacker attempting a gore in the circle?
I see a depression cycle coming here in America (my home). What do you do with an economy like America after it’s been subjugated with highly productive machines & human work forces of Chinese, Indians and Mexicans?
You’d trade a balance sheet for real property if your a matador.
I wish there was another play in this world than let you gamblers trade our real property into Bull circles abroad. Auctions will be coming back, but I think it’ll be for the big stuff, not things you find on ebay.
I did wish for balance across the world, but I was hoping the Better Homes and Gardens here at home wouldn’t turn into a slum.
Let me also add this about number 8: “The Fed stands by ready to cut if this gets much worse.”
—
What’s so interesting to me recently is the dual rationalizations that are being presented by those who perceive greater upcoming strength in U.S. economic output as a reason to be aggressive buyers of U.S. equities.
The claim is that the world is awash in ‘liquidity’ that’s a component of the Goldilocks scenario that, to them, we appear to be experiencing, and further that the market can’t decline in the face of so much liquidity.
Last week was a bit of a jolt to that notion, and whether it continues or not is beyond my capacity to know. I make no recommendations on this blog. I am my own best and most worthy opponent in any current debate about the economy and markets. Objectivity is my religion… Contemplation is the altar where I worship.
So, the confusing thing to me is that at the same instant they seem to believe that a world awash in liquidity would prevent an equity market from getting worse, they assume that the very worsening market, although unlikely in their minds, would be an instantaneous indicator of a reason for the Fed to suddenly feel it necessary to install an even higher level of liquidity than the liquidity we’re all bathing in now.
Thus, it is truly the level of the equity markets that is their only perception of the decision criteria that would ordinarily be applied by the Fed.
Were we to experience another 300-400 point hit in the Dow next week, those who have been screaming about abundant ‘liquidity’ at every questioning of the level of equity markets, would then begin to scream their complaints toward the Fed for failing to provide the very liquidity they now claim we’re awash in. I may overstate the case somewhat, but if the market goes down willy-nilly, the screaming will eventually start, no doubt.
The Fed has unequivocally had the intent to dent liquidity since the last approximate whole year of Greenspan’s tenure, and so it would be very interesting to observe whether they would think it had been sufficiently reduced merely if the equity markets take a set-back at the same time the economy might otherwise demonstrate equilibrium in prices, employment and interest rates.
In other words; Is the mission of the Fed to support stock market equity prices, or is it to support equilibrium in the pricing structure of all goods and services provided in a total economy?
So, what’s the story Mr. Fed?
Ben – IMO the answer for Eclectic is:
The Fed should support equilibrium pricing structure of all goods and services.
Stop letting the market’s print money/capital on account sheets.
Unless I’m missing the big secret, ie, its a free world for the taking, pay your debt back if you can, if you can’t, thanks for trying and helping make the world go round. If this sentence is true, tell the poor. Just tell everyone not to be wasteful.
Correction? The title was innapropriately named.
It wasn’t a crash; “one day wonder” presumes its over, and it may not be; volatility certainly understates the magnitude of what happened.
I’ve used the word “Whackage” in the past — but its not a real word, so the editors won’t go for it . . .
Phil, what pithy word would you give it?
phil says, the word i would use to describe the recent whackage is— “truthiness”.